Question 5: Phillips Curve Let p, π, m and U denote actual inflation rate, expected inflation...
Question 5: Phillips Curve Let p, π, m and U denote actual inflation rate, expected inflation rate, growth rate of money supply, and unemployment rate respectively. Suppose that the growth rate of money supply, m, is constant. The evolution of p, π and U is characterized by following equations: p − π = α − βU, α & β > 0. (1) π˙ = δ(p − π), 0 < δ < 1 & (2) U˙ = −µ(m − p), µ > 0. (3)
a. Derive the system of differential equations in terms of π and U. [Marks 3]
b. Write down the co-efficient matrix, A, associated with the system derived in (a) and find tr(A) and |A|. [Marks 2]
c. Derive the characteristic roots of the system of differential equation. [Marks 1]
d. Derive the steady-state values of p, π and U. [Marks 1]
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Question 5: Phillips Curve Let p, π, m and U denote actual
inflation rate, expected inflation...
Assume that unemployment, u, is related to inflation, π, according to the following Phillips curve:
Assume that unemployment, u, is related to inflation, π, according to the following Phillips curve: u = u − φ (π−πe), where u is the natural rate of unemployment and πe is the expected rate of inflation. Assume rational expectations and that the central bank’s preferences are given by the loss function L(u,π) =λu+π2, where λ denotes the weight that the central bank assigns unemployment.a. Suppose that φ = 1. Show what rate of inflation a central bank with λ...
4. (2.5 PTS) Assume the following Phillips curve: where π is the inflation rate, π et...
4. (2.5 PTS) Assume the following Phillips curve: where π is the inflation rate, π et is the expected inflation rate, ut the unemployment rate, un the natural rate of unemployment. The rule of expectations is π e.-π t-1 The economy is initially (t-0) in medium term equilibrium, with the unemployment rate equal to 10% and the inflation rate equal to 8%. a) Suppose the monetary authority decides to lower the inflation rate to 2%. It faces two options: i)...
According to the long-run Phillips curve, if the central bank increases the growth rate of the money supply, a. inflation and unemployment both rise. b. inflation rises and unemployment falls. c. only employment rises. d. only infla
1. According to the long-run Phillips curve, if the central bank increases the growth rate of the money supply, a. inflation and unemployment both rise.b. inflation rises and unemployment falls.c. only employment rises.d. only inflation rises.
What is the time-inconsistency problem? Is an independent central bank the solution? 'The economy's behaviour differs...
What is the time-inconsistency problem? Is an independent central bank the solution? 'The economy's behaviour differs radically under rational and adaptive expectations' Discuss 2. 3. Does monetary feedback policy have no effect on the economy's output under rational expectations? Compare and contrast the effects of a rise in government spending on an economy under a) fixed and b) floating exchange rates. 5. Explain the workings of the Classical Model. What would the model imply for the economy if there was...
Q. 15 marks. If for an economy the money demand function is (M/P)' = 1000-40r, Money...
Q. 15 marks. If for an economy the money demand function is (M/P)' = 1000-40r, Money Supply M - 3,000 and the price level is 5.. a. What is the equilibrium interest rate? b. What is the equilibrium interest rate if the supply of money is reduced from 3000 to 2000? c. What is the equilibrium interest rate if the money supply is same as before at 3000 but the price level is reduced to 4? Q2. 10 marks. Similar...
i only need question 5, thanks 4. Suppose that the Phillips curve is given by TT,...
i
only need question 5, thanks
4. Suppose that the Phillips curve is given by TT, = 1 + 0.1 - 2u a. What is the natural rate of unemployment? Assume that expected inflation is given by m = (1 - 0) +010-1 And suppose that is initially equal to zero and it is given and does not change. It could be zero or any positive value. Suppose that the rate of unemployment is initially equal to the natural rate....
Consider an economy with a natural unemployment rate, u, of 4%. The expectations-augmented Philli...
Consider an economy with a natural unemployment rate, u, of 4%. The expectations-augmented Phillips curve is Assume that Okun's Law holds so that a 1 percentage point increase in the unemployment rate maintained for one year reduces GDP by 2% of full employment output. Note: Okun's Law can be expressed as: 2( u-u) a. Consider a two-year disinflation. In the first year actual inflation, π' is 14% and expected inflation, π.s 18%. What is the first year unemployment rate? %...
1. draw this graph with a multi point line Inflation Rate (%) Unemployment Rate (%) 5...
1. draw this graph with a multi point line Inflation Rate (%) Unemployment Rate (%) 5 2 3 4 1 6 0 7 Use the data in the accompanying table and the multi-point line tool to plot a short-run Phillips curve and label it "PC." 2. Deflation can be a problem because it: leads to higher wages. makes it more difficult to pay off debt. can easily become hyperinflation. increases interest rates. 3. The idea that a change in the...
The equation of exchange states that the product of the quantity of money, M, and the...
The equation of exchange states that the product of the quantity
of money, M, and the velocity of money, V, equals
the product of the price level, P, and the quantity of
real output, Q:
??=??
Because the percentage change in the product of two variables is
approximately equal to the sum of the percentage changes in the
variables, the equation of exchange can be written in growth rate
form as
%Δ?+%Δ?=%Δ?+%Δ?
where %Δ means "percentage change in."
a. Suppose...
Question 3: (45 marks] Suppose the price-setting equation is given by P= (1 + m)W where...
Question 3: (45 marks] Suppose the price-setting equation is given by P= (1 + m)W where m is the markup. The wage-setting equation is given by W = pe? where z are unemployment benefts and u is the unemployment rate. 1. Derive the real wage and unemployment consistent with equilibrium in the labor market in the medium run. Is this the natural rate of unemployment? Does the equilibrium rate of unemployment change if unemployment benefts decrease? Explain? (8 marks] 2....
4. (2.5 PTS) Assume the following Phillips curve: where π is the inflation rate, π et is the expected inflation rate, ut the unemployment rate, un the natural rate of unemployment. The rule of expectations is π e.-π t-1 The economy is initially (t-0) in medium term equilibrium, with the unemployment rate equal to 10% and the inflation rate equal to 8%. a) Suppose the monetary authority decides to lower the inflation rate to 2%. It faces two options: i)...
What is the time-inconsistency problem? Is an independent central bank the solution? 'The economy's behaviour differs radically under rational and adaptive expectations' Discuss 2. 3. Does monetary feedback policy have no effect on the economy's output under rational expectations? Compare and contrast the effects of a rise in government spending on an economy under a) fixed and b) floating exchange rates. 5. Explain the workings of the Classical Model. What would the model imply for the economy if there was...
Q. 15 marks. If for an economy the money demand function is (M/P)' = 1000-40r, Money Supply M - 3,000 and the price level is 5.. a. What is the equilibrium interest rate? b. What is the equilibrium interest rate if the supply of money is reduced from 3000 to 2000? c. What is the equilibrium interest rate if the money supply is same as before at 3000 but the price level is reduced to 4? Q2. 10 marks. Similar...
i
only need question 5, thanks
4. Suppose that the Phillips curve is given by TT, = 1 + 0.1 - 2u a. What is the natural rate of unemployment? Assume that expected inflation is given by m = (1 - 0) +010-1 And suppose that is initially equal to zero and it is given and does not change. It could be zero or any positive value. Suppose that the rate of unemployment is initially equal to the natural rate....
Consider an economy with a natural unemployment rate, u, of 4%. The expectations-augmented Phillips curve is Assume that Okun's Law holds so that a 1 percentage point increase in the unemployment rate maintained for one year reduces GDP by 2% of full employment output. Note: Okun's Law can be expressed as: 2( u-u) a. Consider a two-year disinflation. In the first year actual inflation, π' is 14% and expected inflation, π.s 18%. What is the first year unemployment rate? %...
The equation of exchange states that the product of the quantity
of money, M, and the velocity of money, V, equals
the product of the price level, P, and the quantity of
real output, Q:
??=??
Because the percentage change in the product of two variables is
approximately equal to the sum of the percentage changes in the
variables, the equation of exchange can be written in growth rate
form as
%Δ?+%Δ?=%Δ?+%Δ?
where %Δ means "percentage change in."
a. Suppose...
Question 3: (45 marks] Suppose the price-setting equation is given by P= (1 + m)W where m is the markup. The wage-setting equation is given by W = pe? where z are unemployment benefts and u is the unemployment rate. 1. Derive the real wage and unemployment consistent with equilibrium in the labor market in the medium run. Is this the natural rate of unemployment? Does the equilibrium rate of unemployment change if unemployment benefts decrease? Explain? (8 marks] 2....
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